Sources of Latency in a Financial Communications Network

Posted by John Kornegay on Tue, Aug 14, 2018 @ 10:08 AM

The world’s financial communication networks are a paradigm of the modern world, and they operate at very high speeds through necessity, often using fiber optic technology. So fine are the lines between success and failure in today’s trading environment that just tiny fractions of seconds do matter. When financial institutions trade via these networks, shaving microseconds off network latency can result in a significant competitive advantage and millions of dollars annually. To reduce latency, one must understand the factors that can cause latency.

So, what are some of the primary sources of latency in these fiber optic networks?

Network Hardware & Transport Delays

Across a fiber network, there are certain unavoidable sources of network latency which result from the hardware and optical transport gear that is deployed throughout the system. While many people assume that data zips around at the speed of light, hardware that is added to the network serves as a key source of delays, which can vary based on the size and scope of the network. Simply put, it takes time for devices to complete actions especially any that are converting signals between the electrical and optical domains.

As noted in a 2017 whitepaper by Joseph Coffey at CommScope, the diagram below shows at least four sources of latency (aside from the optical fiber itself) related to the optical communications hardware:

Latency In Optical Fiber Systems


Source: “Latency In Optical Fiber Systems,” Joseph Coffey, CommScope, 2017

In addition to all of the various hardware and systems at each end of a fiber route, devices placed at other points in the network can add latency. For example, Erbium-Doped Fiber Amplifiers (EDFA) that are necessary to amplify a signal over longer distances add delay. Although very minimal, a long-distance network may require several within a route, which compounds that delay value.

Proximity and Optical Fiber Delays

In addition to the network hardware, the other key source of latency in an optical network relates to the total distance of fiber between two connected points. The closer the proximity between two endpoints and/or the shorter the route that can be utilized, the lesser the delay value will be.

Optical fiber delay, as discussed in a previous article Calculating Optical Fiber Latency, can be calculated based on the parameters of the fiber itself, specifically the relationship between the speed of light and the refractive index of the fiber.

In the highly competitive world of financial trading, some companies have invested tens or hundreds of millions of dollars to minimize the delays associated with optical fiber delays. Whether it’s laying a more direct fiber route between cities or even moving gear a few racks closer to the fiber access point inside a data center, every possible improvement to minimize the fiber distance is often attempted to reduce latency.

Intentionally Added Delays

After spending time discussing sources of latency and why financial network operators seek to reduce it, do people sometimes really seek to add latency/delays in a network intentionally? Surprisingly, the answer is ‘yes’ and for a few possible reasons. For this article, we will not go into heavy detail, but it should be noted that adding delays can and do serve a purpose.

In some cases, it’s necessary to add latency at the end of a fiber route to ensure signals arrive at a similar time from a different location. This is especially the case in higher speed systems, where signal timing becomes more of a critical factor as distances increase. Some firms are also purposely slowing down data transactions using pre-determined lengths of optical fiber, to take away the latency advantages gained by some high-speed traders.

Additionally, some financial network service providers are known to add delays as a way to tier service speeds for their customers. While it may not seem like much to the general population to have a service speed just fractions of a second faster/slower than someone else, in the world of algorithmic trading the difference can be substantial over the long-term.

Latency is a Key Factor in Financial Networks

The primary takeaway from this article is that latency is an unavoidable and critical factor within the high-speed financial networks that drive today’s global economy. To minimize time delays within a fiber-based network, one must first understand the sources and causes of latency before seeking ways in which they might work to reduce it. Companies have taken major strides in recent years to minimize latency and its subsequent impact significantly. However, it will continue to be a key factor that is addressed by equipment manufacturers, service providers, and network operators as the demand for faster systems continue to grow.

M2 Optics Optical Latency Calculator

Since 2001, M2 Optics has been an established manufacturer and innovator of professional optical fiber platforms for fiber network simulation, latency / optical time delay, fiber training, and demonstration applications.  Our customer base includes many of the world's most recognized communications service providers, equipment manufacturers, data centers, web service providers, financial institutions, research institutions, and government agencies.

Topics: latency